Schwab's expenses are now a few basis points lower than Vanguard's for everything that both offer except small-cap (equal), intermediate-term Treasury (equal if you have $50K for Vanguard Admiral shares), and international small-cap (75% of Schwab's SCHC and 25% of EWX or EEMS to get the same allocation is 0.31% versus Vanguard's 0.28% for VSS). Schwab is still missing some classes, notably small-cap growth and value, and short-term and long-term bonds.

Here is a comparison between Schwab and Vanguard ETF expenses (or mutual fund expenses if Vanguard does not have an ETF).

U.S. Broad Market 0.04% vs. 0.06%

U.S. Large-Cap 0.04% vs 0.05% on 500 Index, 0.10% on Large-Cap Index

U.S. Large-Cap Growth 0.07% vs 0.10%

U.S. Large-Cap Value 0.07% vs 0.10%

U.S. Dividend Equity 0.07% vs 0.13% on both Dividend Appreciation and High Dividend Yield

Great news for consumers! I wonder if Schwab is charging below cost, and how low fees from this battle will eventually go. Will we ever see a (loss-leader) ER of 0?

I usually think of Vanguard as having the edge in this battle, as they don't need to worry about a profit margin. But if Schwab cuts costs here to bring in customers, recouping dollars via their paid products (portfolio analysis, trading fees, etc.), then I can see a world where Schwab has a long run pricing advantage on ETFs.

Here's a link to Schwab's web page listing the new lower fees with a comparison to Vanguard and SPDR ETFs: Schwab ETFs.

Even before halving the ER from 0.14% to 0.07% the Schwab's TIPS ETF (SCHP) had the lowest ER of all the TIPS ETFs that cover the entire maturity spectrum. Schwab has even cleaned up the web pages that list its holdings so you can tell what they are!

I just finished rolling over an old 401(k) into a new Vanguard account, so it's just my luck that Vanguard is now solidly in second place when it comes to low-cost funds. On the other hand, it is hard to see how Schwab is going to be able to maintain these low ER's indefinitely. Schwab has a bit of a history of offering perks and then withdrawing them; their reward credit cards for example.

This certainly makes Fidelity look backward: They have no ETF's of their own. My Fido Account Executive continues to insist that active management works and costs don't matter. I wonder how that party-line will change with the additional pressure from Schwab.

In any case, this is great news for us consumers. Let the ER's wars begin!

Alskar wrote:I just finished rolling over an old 401(k) into a new Vanguard account, so it's just my luck that Vanguard is now solidly in second place when it comes to low-cost funds. On the other hand, it is hard to see how Schwab is going to be able to maintain these low ER's indefinitely. Schwab has a bit of a history of offering perks and then withdrawing them; their reward credit cards for example.

Therefore, I wouldn't recommend the Schwab ETFs in a taxable account; if the fees go back up, you must either pay tax on the capital gain to switch to Vanguard, or stay with Schwab's higher fees. But in an IRA, you can switch back for no more than a few cents per share in trading costs. (The choice is still not clear; you might compare tracking error and see whether Vanguard can make up for three basis points.)

Crazy low prices, an ER of $40 per 100k on the Broad Mkt doesn't cover postage for those literature mailing fools. I've had a Simple IRA there for ages and have opted for paperless for everything I know of and they still find reasons to mail me piles of stuff.

My wife's 401k is with schwab, but doesn't allow for investments outside of the selected mutual funds...oh but WAIT!

I logged in and poked around, and saw this PCRA option, which seems like it's similar to an "add-on" brokerage account to the 401k. I had read their literature on it in the past, and ignored it, because I was confused, and thought it was merely an option to have an advisor help with the account. There are many threads on the subject, just search for "PCRA".

I'm not the brightest bulb in the pencil box*, but this isn't my first drive around the pool. So if *I* missed the significance of what a PCRA account is, perhaps others have as well, which is why I'm talking about it.

But be careful, because it seems the fees within a PCRA can vary from account to account, both within the PCRA and also some employer plans will charge a fee if you exercise the option to invest in a PCRA.

NS

* An example? I set up the PCRA account. But I cannot find information on how one actually FUNDS the PCRA acccount from the 401k, despite looking around for 20+ minutes. Eventually, I have to get my wife to call Schwab and get some information. But perhaps funding the account is done through mail or phone call, rather than online...

-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

AndroAsc wrote:I think we are at a point where tracking error > expense ratio.

I don't care if Schwab options are 0.02% cheaper than Vanguard, hell I don't even care if they have a zero bp fund. The more important question is: Can they track their index as well as Vanguard?

Good point, also I think it is worth providing 3-4 months to understand how VG, Fido, iShares and others will respond and also whether Schwab is really planning to keep fees this low or are these "teaser" fees to draw in funds that will go up over time.

We just switched our accounts (everything) from Schwab to Vanguard. I can't say anything bad about Schwab, but even with the price cuts, we're disappointed at their lack of building out in ETFs. We keep things simple, but to me just to have the ease-of-use of ETFs like Total International and broader assortment of stock and bond index funds is just much more helpful. For example, we've decided to use two of the Vanguard tax-managed funds rather than ETFs in our taxable account. (Strangely, we found that the Schwab ETFs, even though they're not structured as a second share class, are less tax efficient in many cases than the Vanguard ETFs.) We've also found some nice differences in dealing with a fund company rather than a broker-dealer. (I still remember when Schwab's trading revenues were down several years ago and they hiked fees.)

neurosphere wrote:I logged in and poked around, and saw this PCRA option, which seems like it's similar to an "add-on" brokerage account to the 401k.

You made me look it up! "Schwab Personal Choice Retirement Account is a self-directed brokerage account (SDBA) that resides within your employer-sponsored retirement plan. In addition to the choices typically offered by retirement plans, PCRA lets you invest in a much wider range of investments."

I'm glad to see Schwab lowering fees and we can only hope it's not a temporary thing. They charge $8.95 to trade my Vanguard ETFs and $0 for the Schwab versions so, while I rarely need to trade, these lower fees may tempt me to move some of my Vanguard index ETFs to Schwab's in the future. All I need to do is finally get over the YieldPlus fiasco and trust their products again. (I have owned their S&P500 as my core stock fund forever as it's hard to screw that up.)

AndroAsc wrote:I think we are at a point where tracking error > expense ratio.

I don't care if Schwab options are 0.02% cheaper than Vanguard, hell I don't even care if they have a zero bp fund. The more important question is: Can they track their index as well as Vanguard?

Good point, also I think it is worth providing 3-4 months to understand how VG, Fido, iShares and others will respond and also whether Schwab is really planning to keep fees this low or are these "teaser" fees to draw in funds that will go up over time.

Yes, it looks that way on Schwab's web site. I see 1/3/2012 - 9/20/2012 returns of 5.82% for SCHP and 6.28% for the Barclays' index, a shortfall of 0.46% points. * But this is probably just be a data glitch. ** I say this because this Yahoo 1-year chart of SCHP, TIP, & IPE shows the three funds (which all track the same index) performing almost identically over the past year. (Actually SCHP is slightly higher.)

* On the SCHP Summary Tab, click "Tracking Error" on right side under Additional Information and then choose the Tracking Error and YTD tabs.** On the 3-month Tracking Error tab, one can see that the divergence between the index and SCHP occurs all at once in early July.

I use Schwab's PCRA. For my 401(k) plan, there is no fee to use the PCRA. I believe whether there is a fee or not depends on how your employer had negotiated with Schwab.

If you have the PCRA setup in your 401(k) plan, it will appear as an investment option in the Schwab 401(k) retirement website (just like any other investment option, for e.g. Pimco's Total Return Bond fund).

You need to 'exchange' your money into the PCRA option from the 401(k) website, and the money will appear in your Schwab brokerage account the next day. You perform your ETF trades in the Schwab brokerage account. This is separate from the 401(k) website.

I need to mention that you need to apply to get the PCRA option. It does not appear by default. My observation is that most of my coworkers do not apply for the PCRA option.

There is a diminishing marginal return on prices being cut, and I think we've pretty much reached it when we're discussing 0.04% vs 0.05% on US largecap stocks.

If you invested $10,000 in Schwab's ETF (0.04%) large cap ETF vs. Vanguard's (0.05%) large cap ETF, over 20 years and an expected return of 8% a year from the underlying index, you'd have a total of 85 dollars more in your Schwab investment.Schwab - 10000 * 1.0796^20 = 46265.52Vanguard - 10000 * 1.0795^20 = 46179.89Difference - $85.63. That's $4.28 a year.

As consumers, on this front, we've won. Celebrate (and keep your guard up.) Let's focus on other items, like fees in 401k(s). As AndroAsc wrote, tracking error is more important now than fees if you're with a low fee company.

indexfundfan wrote:If you have the PCRA setup in your 401(k) plan, it will appear as an investment option in the Schwab 401(k) retirement website (just like any other investment option, for e.g. Pimco's Total Return Bond fund).

Found it!!! Thanks, that saved me a lot of time.

NS

-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

Rick Ferri wrote:Investors should consider all factors before choosing an ETF. I wrote an article in May that compares Schwab's ETFs to Vanguard on several points including fees at the time. Here is the blog:

From reading Rick's article (again), Vanguard funds tend to have more holdings, hence more diversified.

Big picture, I bet it's a wash for two of the three in the article (probably still an advantage for REIT's).

I bet Vanguard will "tweak" by 0.01%, or whatever, to get to 0.09% (that old 9 pricing thing) on certain ETF's/funds. I still see most $ going to Vanguard. As mentioned above, they tend to pull the rug from under you less than Schwab. Plus, investor inertia at that level of cost structure probably is pretty high. I don't feel motivated to move.

RM

I figure the odds be fifty-fifty I just might have something to say. FZ

1. No fees from employer or Schwab.2. 10% of my funds and ongoing contributions must remain in regular 401k.3. Auto-reinvestment occurs by choosing PCRA as if it's a fund. That money then goes into your cash account where it can be placed in mutual funds on the 5th and 20th of each month. $100 minimum to set up an auto into a fund. Obviously no ETF options available in the auto investment side.4. My combined 401k ER after setting up the PCRA and then getting these rather significant discounts has dropped from 0.65% to 0.145%. Plus my asset allocation is WAY more to my liking. 5. My co-workers seem to not realize this option exists or how glorious it is.

jasonv wrote:Great, this is just in time for me to take advantage of the Self Directed option being added to my 401k.

For those of you who have used Schwab PCRA, am I correct in understanding that the minimum time "out of the market" is one day when transferrin from a plan selected Schwab fund to a Schwab ETF?

Yes, one day if you sell the mutual fund, move the funds to the brokerage to buy the ETF.

From brokerage back to mutual fund is longer because of the settlement period for stocks and ETFs.

Can you take advantage of the settlement of ETFs to eliminate the one-day delay with Schwab? You can do this with Vanguard; if you buy an ETF on Monday, you only need to have the cash in your money-market account by Thursday, so you can sell a mutual fund on Monday to pay for the ETF.

jasonv wrote:Great, this is just in time for me to take advantage of the Self Directed option being added to my 401k.

For those of you who have used Schwab PCRA, am I correct in understanding that the minimum time "out of the market" is one day when transferrin from a plan selected Schwab fund to a Schwab ETF?

Yes, one day if you sell the mutual fund, move the funds to the brokerage to buy the ETF.

From brokerage back to mutual fund is longer because of the settlement period for stocks and ETFs.

Can you take advantage of the settlement of ETFs to eliminate the one-day delay with Schwab? You can do this with Vanguard; if you buy an ETF on Monday, you only need to have the cash in your money-market account by Thursday, so you can sell a mutual fund on Monday to pay for the ETF.

No. You would not be able to make the ETF purchase without the funds in the brokerage account.

jasonv wrote:Great, this is just in time for me to take advantage of the Self Directed option being added to my 401k.

For those of you who have used Schwab PCRA, am I correct in understanding that the minimum time "out of the market" is one day when transferrin from a plan selected Schwab fund to a Schwab ETF?

Yes, one day if you sell the mutual fund, move the funds to the brokerage to buy the ETF.

From brokerage back to mutual fund is longer because of the settlement period for stocks and ETFs.

Can you take advantage of the settlement of ETFs to eliminate the one-day delay with Schwab? You can do this with Vanguard; if you buy an ETF on Monday, you only need to have the cash in your money-market account by Thursday, so you can sell a mutual fund on Monday to pay for the ETF.

No. You would not be able to make the ETF purchase without the funds in the brokerage account.

This has nothing to do with Schwab or Vanguard in a general case. Stocks and ETFs have a T+3 settlement date. That means the money to pay for the purchase has to be in the account on the third business day after to purchase. Bonds and most mutual funds have a T+1 settlement. Which means the money from a sale can be taken out one business day after a sale. So you can avoid the extra day problem. Note however that you can buy and sell in the same account on the same day without regard to settlement date. So you have no problem with Schwab in general. Vg is a different storey because Vg Mutual find and VG brokerage are different entities and you have extra time involved when you are using funds from sales on one side to pay for purchases on the other side. I am unfamiliar with the Schwab PCRA and you may have the same two account problem that you have with Vg and VBS.

A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

AndroAsc wrote:I think we are at a point where tracking error > expense ratio.

I don't care if Schwab options are 0.02% cheaper than Vanguard, hell I don't even care if they have a zero bp fund. The more important question is: Can they track their index as well as Vanguard?

I would bet that the bid/ask spread is higher for Schwab. So not only is tracking error potentially more than the ER, but also the bid/ask spread as well. Does anyone know what the bid ask spreads are on those Schwab ETFs?

AndroAsc wrote:I think we are at a point where tracking error > expense ratio.

I don't care if Schwab options are 0.02% cheaper than Vanguard, hell I don't even care if they have a zero bp fund. The more important question is: Can they track their index as well as Vanguard?

I would bet that the bid/ask spread is higher for Schwab. So not only is tracking error potentially more than the ER, but also the bid/ask spread as well. Does anyone know what the bid ask spreads are on those Schwab ETFs?

I bought and sold SCHB earlier this week and bid-ask was about $0.01, at the most.

letsgobobby wrote:I bought and sold SCHB earlier this week and bid-ask was about $0.01, at the most.

In my case, the choice is between:

1) high ER mutual funds for the asset classes I desire (in the range of 0.7 - 1.3% expense ratios)2) Vanguard ETFs with a $9 fee3) Schwab ETFs with no fee.

#1 is not a good option compared to the others. Assuming that the expense ratios for #2 and #3 are similar, then the question becomes, is a potentially higher bid/ask of the more thinly traded Schwab ETFs going to be more or less expensive than the Vanguard ETFs with the fee, but potentially lower bid/asks?

I guess I have to wait until it's time to place an order, and calculate the bid/ask vs. fee question for an individual Vanguard/Schwab ETF pair.

NS

Last edited by neurosphere on Sat Sep 22, 2012 1:24 pm, edited 1 time in total.

-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

The very low-priced TIPS ETF is the most intriguing to me. Currently I am putting my new TIPS investments into Fidelity's Spartan TIPS mutual fund (FSIQX) with an 0.20% ER, because I get it with no commissions in my 401k.

Perhaps I should move my holdings to SCHP instead. This is one of the very few places where my portfolio is not already as optimal as possible for expense ratios (including using Admiral funds for everything possible and Institutional funds in my 401k).

The thing is that I find ETFs to be quite a pain to deal with compared to plain ol' mutual funds. I'm wondering what the odds are that Vanguard introduces a similarly low-cost true index fund for TIPS, or simply cuts the ERs on its existing offering (VIPSX/VAIPX/VIPIX), or lowers the Admiral minimum to $10k rather than $50k. Any speculation?

chipmonk wrote:The thing is that I find ETFs to be quite a pain to deal with compared to plain ol' mutual funds. I'm wondering what the odds are that Vanguard introduces a similarly low-cost true index fund for TIPS, or simply cuts the ERs on its existing offering (VIPSX/VAIPX/VIPIX), or lowers the Admiral minimum to $10k rather than $50k. Any speculation?

Vanguard operates everything at cost; it doesn't raise or lower expenses because of competition. Because of economies of scale, Vanguard's expenses tend to decrease as funds get larger; this is why 500 Index and Total Stock Market Index have lower expenses than the other index funds, and why the S&P and Russell ETFs (except 500 Index) cost more than the larger MSCI ETFs in the same asset classes. I would expect Vanguard expense ratios on the TIPS fund to decline very slightly as TIPS become more popular.

What I would like to see is a Vanguard alternative to PIMCO's LTPZ which indexes long-term TIPS. Long-term TIPS have higher yields than short-term TIPS, and are the ideal low-risk investment for long-term investors, such as an IRA for someone more than ten years from retirement.

Hmmmm... looks like I spoke too soon about the fee wars being over. I guess we go another round. In addition to tracking and spreads it's also important to look at dividends. When they track different indexes you can get differences in yields that, depending on the size of the investment, can easily swamp ER differences even after tax. It's not all one-way. Sometimes VG has higher yield, sometimes Schwab.

Clearly the cost of running a fund is less than Vanguard and all the other companies (including Schwab) were telling us, or they would have had these low fees all along. Interesting times...

A few years ago, before Vanguard cut the Admiral shares minimum to $100,000, everyone was agonizing over Vanguard Total Stock Market Index having an 0.20% ER, but Fidelity Spartan Total Market Index having an operating ER of 0.20% but an effective ER of 0.10% due to concession.

If you're a purist, you can't get around it--lower is lower. However, if you're a satisficer who does math, well, what matters is the absolute difference between the numbers, not the ratio. The difference between a 1.2% ER and an 0.20% ER is 1%. The difference between an 0.20% ER and an 0.10% ER is 0.1%. The difference between an 0.06% ER and an 0.04% ER is 0.02%.

Still, wouldn't you like to have been a fly on the wall of the Vanguard gunroom the day the Schwab announcement came out?

Karamatsu wrote:Clearly the cost of running a fund is less than Vanguard and all the other companies (including Schwab) were telling us, or they would have had these low fees all along. Interesting times...

Not sure you can make that conclusion. Schwab may be lowering the ERs on these funds below their actual costs for marketing/PR/fund attraction purposes. The likely true lower bound on fees is probably right around where the VG institutional fund ERs are at. There is a gap between admiral shares and those share classes so perhaps we will see some reductions in time.

I believe "new money" into the funds has incrementally reduced the funds administrative costs resulting in the ability to lower fees. I would bet that VG has the ability to match (or beat) Schwab if they consider it a worthwhile business advantage.

mikem wrote:I believe "new money" into the funds has incrementally reduced the funds administrative costs resulting in the ability to lower fees. I would bet that VG has the ability to match (or beat) Schwab if they consider it a worthwhile business advantage.

Vanguard is a mutual benefit company. The mutual funds and ETFs are run at cost to the shareholders. As such, fees are set based on the economics of each fund. There's no consideration of a "worthwhile business advantage."

Rick Ferri

The views expressed by Rick Ferri are strictly his own as a private investor and author and do not reflect the views of any entity or other persons.

mikem wrote:I believe "new money" into the funds has incrementally reduced the funds administrative costs resulting in the ability to lower fees. I would bet that VG has the ability to match (or beat) Schwab if they consider it a worthwhile business advantage.

Vanguard is a mutual benefit company. The mutual funds and ETFs are run at cost to the shareholders. As such, fees are set based on the economics of each fund. There's no consideration of a "worthwhile business advantage."

Rick Ferri

Wellington and Wellesley Funds (albeit managed by outside advisor) fees are negotiated between VG and advisory company. I see your point about the VG funds though.

Yes, this is true. And Wellington recently got a big increase in fee payments according to John Bogle's latest book, The Clash of the Cultures. The jump was large enough for Jack to make a point of it.

Rick Ferri

The views expressed by Rick Ferri are strictly his own as a private investor and author and do not reflect the views of any entity or other persons.

Schwab has a history of bait and switch. I don't see how they can maintain expenses lower than Vanguard, because they are smaller. In the past they have raised expenses on low expense funds after people have large investments in taxable accounts. People stay in the funds to avoid paying the taxes even though the fees are high. The Schwab 1000 index is an example of this.

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The most important thing you should know about me is that I am not an expert.

mikem wrote:I believe "new money" into the funds has incrementally reduced the funds administrative costs resulting in the ability to lower fees. I would bet that VG has the ability to match (or beat) Schwab if they consider it a worthwhile business advantage.

Vanguard is a mutual benefit company. The mutual funds and ETFs are run at cost to the shareholders. As such, fees are set based on the economics of each fund. There's no consideration of a "worthwhile business advantage."

Rick Ferri

While in theory that sounds great, multiple insurance companies are mutual and that doesnt seem to confer any real benefit.

Im not saying anything negative about vanguard, just that a company being mutual isnt something id rest my hat on. Even if it were, companies dont always remain mutual.